News and commentary about road pricing across the globe. Tolls, congestion charging, distance based charging, road user charging. Public policy, economics, technology and more. If Google brought you here, look down the right sidebar for references.

Tuesday, 26 February 2013

Buenos Aires and Santiago both consider forms of congestion pricingDrew Reed in Transportation Nation writes about how Buenos Aires and Santiago are both at least discussing the concept of charging more to use roads at peak times. He cites various articles in Spanish, but the key points are:

Buenos Aires: The city is increasing tolls on three existing toll roads. However, it is particularly increasing tolls at peak times, being 0700-1000 and 1700-2000. Tolls during those periods will be 25-60% higher than at other times. Motorcycles also pay, and will face charges being up to double during the peak compared to the off peak. More details here in Spanish. This isn't particularly revolutionary, but is an obvious step to take with toll roads.Santiago: Santiago already has an extensive toll road network, so this proposal goes further and proposes a congestion charge around the central city effectively to charge non-residents for commuting from out of town. It is an academic proposal, although the article curiously notes that Steer Davies Gleave did a study for congestion charging for Santiago but appeared to come up with small cordon for the historic centre (I'd have thought Santiago had the potential for something much more ambitious given the highly efficient toll road system already in place). The Spanish article is here. Although the idea is interesting, I again think the real potential must be to build upon the existing toll road network.Could BrisConnections have done more to attract toll road users?In October, the Herald Sun reported on an online poll undertaken by the Courier Mail on what it would take for Brisbane motorists to use the now bankrupt AirportLink toll road. Although far from scientific, it suggested that maybe up to 15% would consider using it, if there was a package to pay for both it and the connecting Clem7 toll road, with around 20% interested if there was a capped charge (not uncapped as the article suggests), so that users would only pay up to a set limit (presumely because certainty about how much one would pay reassures users). 53% said nothing would induce them to use it.

Of course we now know that no such package to use both roads was offered, and although there is a capped charge option, it was probably too high to induce interest. No doubt the receivers will be keen on figuring out how to attract more customers, but also want to maximise yield. Package deals may help both roads, given how closely related they are, but that would require receivers to talk to each other.London- Liberal Democrats call for annual inflation adjusted congestion charge

According to Mayorwatch, the Leader of the London Liberal Democrats group in the London Assembly, Caroline Pidgeon, is calling for an annual increase in the congestion charge to reflect inflation because it "is far too low when you consider the adverse impacts that driving has on other Londoners".

All very well, except that the charge itself has doubled since its introduction in 2003, which is far in excess of inflation (which would take it to about £7 today). It was £5 when it was introduced and is £10 now (£9 for registered users).

A far better argument would be to suggest that the charge is too low, rather than an easily dismissed claim about inflation proofing it. It may be better to consider a return to the original later operating hours (6.30pm end period rather than 6.00pm).

Atlantic Cities writes about the enduring public perception problem of congestion pricing

The article by Eric Jaffe is worth reading, and largely reflects on the survey by the Capital Region Transportation Planning Board in Washington DC and its environs. He makes the valuable point that people do not believe congestion pricing would be effective. That seems astonishing to anyone with a basic understanding of economics, but is true. The researchers suggest a trial would make a difference too, by demonstrating success. However, I think there are other issues. One is that people need to know and trust where money raised is going. Another is whether people think they are taxed too much already (which is either true, or if not true, needs to be explained why in this context). Finally, congestion pricing needs to be designed to have finesse, to target individual roads in specific directions of travel and times, so that it avoid charging others unnecessarily. Putting circles around city centres is so last decade, and really only suits cases where such centres are severely congested and major attractors for traffic that can mode shift. Far too often it is seen by engineers as the convenient solution, and far too few actually realise that the city that first did congestion pricing was Singapore - which still has by far the most elegant approach, because it charges individual congested corridors, pricing each of them distinctly. However, to do that well you need economists, and to be careful about your use of traffic models that have never been designed to reflect the collective impact of pricing dozens of individual road links.

Well, according to the Washington Examiner, the Virginia State Senate agreed on Saturday 23 February to a compromise solution, that effectively raises US$3.5 billion over five years with two rather peculiar solutions.

It raises the state's general sales tax from 5 percent to 5.3 percent across most of the state and to 6

percent in Northern Virginia and Hampton Roads. Effectively meaning that everyone buying anything in the state subsidises the roads, regardless of whether they drive, walk, stay at home or run a whole fleet of vehicles. A blatant transfer from non-road users to road users, penalising those who use roads the least to reward those who use them the most.

The second step may on the face of it seem more sensible, that being to replace the 17.5c/gallon (4.62c/l) gas tax with a percentage gas tax of 3.5% on petroleum and 6% on diesel. Sounds great right? More money as prices go up, effectively inflation busting? Well yes, it does become an escalator on the price, which is fine as long as prices go up. If it drops, due to a combination of shale oil and the appreciating US$ (largely as it is treated as a safe haven in the short-medium term), then so does revenue. Presumably the higher rate for diesel is some sort of attempt to reflect the higher damage that trucks cause to the roads, I'm guessing because there is no such thing as light diesel vehicles in Virginia and the fourth power rule (pdf note on this) is beyond the wit and wisdom of politicians.

Clever? No, not really. It really is public policy from the dark ages. It is pure political expediency, because from tax policy and transport policy perspectives, it doesn't make sense. The only economic merit will be how the money is spent, and unless a comprehensive long term asset management programme is put in place, and new capital works are measured purely against some form of independent cost-benefit analysis, you can't be sure of that either.

The economic effect of these measures will be incremental of course, it wont mean an increase in traffic or mode shift of any scale, but it sends a sign. Virginia is happy to tax residents and businesses to prop up the highway system, and happy for road users to get subsidised use of it. Presumably Virginia will start offering people cheap electricity paid for by an increase in sales tax, or maybe phone calls, or water.

Whilst much of the United States and the world shifts towards road users paying to use the roads, and paying for the costs of maintaining and renewing the roads they use, Virginia is taking a step backwards, sharing the cost of a ubiquitous utility with everyone, regardless of how much they use it. It's the sort of approach that some politicians would call socialism if it were applied to other sectors.

What it could have done may have required more political courage and maybe the ability to communicate some basic economics, but it would have been:

- Use tolls where it is feasible and makes financial and economic sense;

- Undertake a comprehensive study on transport costs and charges, to determine the long term needs for public spending on highways, the existing gap between costs and taxes, and options to move forward.

You see the replacement of the gas tax can't be gas tax and sales tax, it has to be an option that involves charging vehicles for actually using the roads. However, VMT/MBUF/distance based charging seems alien to the state.

Instead it adopted an approach that, from the outside, looks less rational and has little regard for economics at all.

Wednesday, 20 February 2013

It has now been reported by various Australian news outlets that Brisconnections, the company behind the AirportLink toll road in Brisbane, has gone into receivership following the withdrawal of support from the company's financial backers.

Regular readers will remember my previous articles about the AirportLink toll road, which is now the second major toll road project in Brisbane to effectively go bankrupt. They are below in chronological order, telling a sad tale of a road that faced construction cost overruns, but has been doomed by optimism bias in demand forecasting.

It has looked increasingly doomed (at least financially) since it was opened. It is, of course, technically superb.

Brisbane Airport Link's complex interchange at Bowen Hills

The road cost A$4.8 billion (US$5 billion) to build and has been open for seven months. It was meant to have an average of 135,000 vehicles a day by now, but the Sydney Morning Herald said only 47,000 a day on average used it in December (a little unfair, given the Christmas season will mean numbers are down with a lack of business traffic). Even if you take that into account, traffic numbers are around 40% of what was forecast. ARUP, the demand modellers in this instance, will be getting legal advice and checking its insurance for fear that it may be in front of a court as AECOM now is over the Clem 7 toll road. You can review ARUP's report to investors on its demand modelling here, on page 110. That is worthy of a look, as you can see some of the assumptions used look now, in hindsight, to be worthy of questioning (i.e. comparing toll prices on a per km basis with other toll roads, which is not how people value time and trips, and treating historic traffic growth as reflecting future growth).

Bear in mind that the toll on the road right now is at a discount of around 45% on the full estimated price, and it still can't get the demand levels that were forecast (it is expected that the price would increase in April 2013 to about halve that discount, and increase again in October 2013, both increases testing the elasticity of demand).

The report said "a consortium of 10 banks, including ANZ and European heavyweights Deutsche Bank and BNP Paribas, finally appointed PPB Advisory as receivers on Tuesday. The banks lent about $3.3 billion to BrisConnections, and stand to lose a sizeable chunk of their money."

Of course, the road remains open. The asset is fixed and there is nothing else that can be done with it, beyond some incremental cost trimming and some price incentives to encourage demand. The road's true market value will be below its construction and financing costs, suggesting that it simply wasn't an economically viable project. It would be interesting to see if there was a recent public sector comparator cost-benefit analysis to compare with the financial business case, which now looks dire.

The Courier Mail reports that Professor John Goldberg of the University of Sydney claims the modelling was used to "work backwards" from expected returns to what figures were needed, which is an outrageous assertion to make. He has himself undertaken his own financial modelling (pdf) of toll road PPPs in Australia and is suspicious of the entire approach. However, his call for a Royal Commission to investigate this is ludicrous, as it is not a matter for the government to be specifically concerned about private companies making malinvestments and losing money. It would be preferable for the state, if it wishes to promote specific projects as PPPs, to commission its own demand forecasts based on determining if a project is worth proceeding with.

Not much, it will continue to operate. The receivers will commission a review of its performance to find a way to maximise revenue and minimise costs. It will remain a prime piece of infrastructure for Brisbane.

The question is whether any legal action will occur, and what long term owner it will have.

Sunday, 17 February 2013

I, along with thousands of other policy, economics, consultancy and transport planning professionals watched the news from London closely today 10 years ago. That was because, although Singapore had pioneered fully electronic congestion pricing five years beforehand, this was London.

Singapore's stunning success was seen, perhaps a little unfairly by some, as reflecting more a culture of obedience towards officialdom, and a democracy that has been unafraid of being authoritarian when it was thought of as being in the national interest. So London was seen as the acid test. If that old-world major city could introduce a congestion charge, it would mean it would be possible for others.

What happened, of course, is now well known. It worked. It cost a lot of money, it reduced the numbers of charged vehicles entering the charged zone by around 20%, and raised a little money. It's become a political non-issue, with there being little dispute that retention of the charge makes sense.

Since then it was extended to the west for four years, and that extension was abolished, because of local opposition (including genuine concern about effects on businesses in more suburban areas). The price has doubled in nominal terms, but the system has evolved from being entirely declaration based (all users having to pay, in advance, whether or not they drove in the charging area during charging times) to offering a detection based account (whereby for an annual charge, you get an account billed automatically for driving within the charging zone). The system costs have dropped significantly, partly due to technology (a shift from using live video to digitised images, and improved accuracy of ANPR) and partly due to a change in contractor (as the initial contractor Capita understandably charged a lot to ensure that the system would be working in a tight time frame).

However, after ten years some key questions should be asked.

Has the congestion charge reduced congestion, sustainably?

Has the congestion charge made a lot of money for Transport for London?

Has the congestion charge positively or negatively affected business in London?

Did the success of London make it easier for other cities to introduce congestion charging?

Tuesday, 12 February 2013

Once again, news media in the UK have been reporting on the ongoing discussions within government to reform motoring taxes in the context of wider reforms of the highways sector. Yet, once again they are reporting on proposals that will deliver virtually nothing in terms of the two key objectives of road user charging - that being more revenue, and better management of traffic demand (one can also argue that it is about better resource allocation as well).

The Daily Mail reports on what it calls a £150 a year "motorway charge", being the idea for a vignette for light vehicles for access to the motorway network only. The idea actually being considered is to cut vehicle excise duty (commonly called road tax) by about the same amount, although the report doesn't make that as clear as it could, as virtually all comments on the website are the predictable "damned if I am paying more.. how dare they" outrage, which anyone reading the article in a cursory way would understandably feel.

Once again, communication of anything to do with motoring taxes is damnably difficult, a factor the government should bear in mind before doing anything that creates more heat than actual gains in policy.

Yet it isn't about raising more money, because it couldn't do so, or at least not by sufficient amounts to get policy makers excited. A bit of rejigging of vehicle excise duty might see some low emission vehicles paying the vignette (given the vehicle excise duty they pay now is less than that amount). It may be easier to sustain inflation adjustment of a vignette than the current vehicle excise duty, but that's about it.

Another article, from an insurance company claims that charges would vary by weight and emissions ratings, which is exactly what vehicle excise duty does now, in part because it tries to reflect the greater wear and tear that heavier trucks impose upon the road network.

The impression may be that the story is a deliberate "leak" to test public opinion. If so, it is hardly likely to be given a positive response, in part because nobody could believe that the reason for doing such a reform is legitimate.

What is the UK government wanting to do?

The key outcome sought is to generate more investment in improving roads, most particularly the English strategic road network (Scotland, Wales and Northern Ireland are outside the scope of this, and there has been little said of local roads, although they are in a far more needy state than the motorway network).

The interest is in getting private companies to invest in capital improvements, but given that they wont be allowed to toll these roads (except for a handful of cases where new capacity is provided and it is technically feasible to toll), there needs to be another source of revenue.

What options are there?
Given that tolling existing capacity has effectively been ruled out, there are two ways to ensure a revenue stream for private investors.

The first one is for any new private equity investor to be offered a concession which involves contractual payments, similar to the Private Finance Initiative (PFI) schemes that already exist in the UK highways sector (e.g. for the M25 and M40). However, as this typically is used for case by case projects, it is not seen as being flexible enough to cover companies literally taking over parts of the network for extended periods.

The second one is to take part of existing motoring taxes and effectively change its status so that it becomes a dedicated stream of revenue from motorists. That in itself could be achieved in two ways. The simplest way would be legal hypothecation, so that a set amount of the tax collected or proportion is placed into a legally defined roads fund, that would be allocated for the privately managed roads. International best practice in doing this would mean a separate funding board be set up, which would manage the fund and be legally required to spend the proceeds on bids for funding.

However, the UK public service has long been suspicious of hypothecation, for fear that it changes the status of taxes into user fees, and means that it would be a precedent for new hypothecated taxes, even though evidence from developed countries with hypothecation does not seem to support this though (I come from New Zealand which has successfully managed a transition to a fully hypothecated land transport fund, which the World Bank has long considered to be international best practice).

So the alternative is to split an existing tax, making part of it a fee that can be accessed by the new private investors in the roads. The Vehicle Excise Duty would remain, at a lower rate, but the new "access fee" would be voluntary (in that it was only paid for using the motorways), and could be regionalised.

Will this raise any more money?

No. Unless the private investors are given the right to set the charges of the fee, and presumably would have control over a road or set of roads to justify it (and enforce payment of the fee for those roads). This seems unlikely, unless the government reforms charges so some pay more.

No. It is a tax on ownership, not road usage, and whether it is redefined as an access charge for motorways or not, the most that might happen is that a little traffic may redistribute from the motorways to local roads, by those who choose not to pay the "access charge". It wont be charging for congestion (although it would be possible to introduce Brian Wadsworth's proposal regardless of such a change), and it wont result in motorists thinking twice about the costs of a trip.

So why do it?

Well it appears to be a compromise between the traditional antipathy to hypothecation and actually undertaking serious reform. Vehicle excise duty is at best a tax that recovers some of the fixed costs of the road network, and provides modest incentives to own low emission vehicles, but little else. There is little good reason to impose a vignette for cars without the presence of large numbers of visiting non-national cars (which there are not). Meanwhile, the proverbial elephant in the room is fuel duty. Treasury and some politicians see this as a tax, and want to blank out any linkage of it to usage of the roads. This is disingenuous, as the revenue generated would simply not exist if the roads were not being used. Beyond part of it potentially being justified as an environmental tax (albeit to be used as general revenue), it is difficult to not see it as a tax on using the roads (especially given the varying exemptions and different categories of fuel and taxation levels available for different uses of fuel).

Calling it an "access charge" implies that it could transform into a usage based charge into the future, which is true, but it is not as if this makes it that much easier.

What should be done?
If this is just about providing a secure source of revenue for private investors, in the absence of tolls, it would be simpler to avoid changing anything for motorists and just hypothecate Vehicle Excise Duty (and the forthcoming HGV vignette) in its entirety and use it to set up an independent roads fund that would "buy" road "services" on long term contracts to public and private providers of roads. That would also include bids from the devolved transport bureaucracies in Wales, Scotland and Northern Ireland, and local authorities. Now the total revenue from Vehicle Excise Duty and the HGV vignette is less than what is spent on roads by central government through various outputs, but it would be enough to guarantee funding for private investment in the strategic road network. I'd also argue that a small portion of fuel duty should also be hypothecated, because it is a form of user charge, and it provides at least some of the revenue for a roads fund based on usage (which would grow in the event of growth in traffic).

Then any investors in roads could be allowed to contract out of the fund, by charging motorists directly and then offering them full refunds in the fuel duty component and a partial refund in vehicle excise duty.

Until fuel duty is confronted, this whole area cannot be reformed in a way that is satisfactory to motorists, because you cannot hide from the point that motorists know fuel tax is high and so they link that to paying to use the roads. Meanwhile, unless you are going to reform road charging to increase revenue or improve the efficiency of the system through behaviour change, I do not know why you would bother.

It is a good result with "A distribution totalling 15.5 cents per stapled security will be paid on 14 February 2013 for the six months ended 31 December 2012. This will be made up of a 12.0 cent distribution from Transurban Holding Trust and a 3.5 cent fully franked dividend from Transurban Holdings Limited". There is also a A$5 billion pipeline of investments for the group (being the Hills M2, I-95 Express Lanes and M5 widening projects

However, it's worth having a look at Transurban's portfolio of assets to see what they are looking like, and what it teaches future investors about the profile of such investments, compare to the full year results for 2012 which I reported on here. Transurban's presentation is the source of much of the following conclusions.

Melbourne Citylink

Proving that a major urban motorway can be a profitable investment that delivers enormous benefits to a metropolis, Citylink continues to be the "jewel in the crown" of Transurban delivering nearly half of all of its toll revenue. Traffic growth has been 2% in the past year and toll revenue growth 4% (EBITDA 3.9%) including an adjustment for the bedding down of a new billing system, which added short term costs.

The key prospects for this project are in a related proposal, the East-West Link, which would connect Melbourne's Eastern Freeway with the Western Ring Road interchanging with Citylink. Transurban is targeting this as an obvious potential enhancement to its portfolio. There are also plans to upgrade Citylink. Bear in mind Melbourne Citylink is the corridor between the city and Melbourne's major airport (there is no rail link), and is the only decent east-west corridor at present. It is strategically vital, but thrives as a privately owned toll road. Concession ends in 2034.

Revenue of A$267.1m, costs of A$52m, depreciation/amortisation/financing costs of $A100.8m, leaving a profit before tax of A$114.3m

Sydney Hills M2

This motorway has suffered due to extensive roadworks to add new interchange capacity, which has deterred trips because of lower speed limits. Traffic volumes are down 2%, with toll revenue down 1.7% (EBITDA 1.9%). The works are expected to be completed mid 2013, with the hope that traffic volumes will recover. The M2 is a core part of the Sydney orbital toll road network, connecting the northern suburbs to the west, and so has affected the results of two other Transurban assets. It is more of a suburban motorway that needs orbital urban traffic to thrive, so will be dependent on how there is growth in suburb-suburb commuter and leisure traffic (which is not conducive to public transport usage, which is high in Sydney for trips to the downtown area). It is expected to deliver significant growth in 2014, as temporary speed restrictions are removed. Concession ends in 2046.

Revenue of A$73.4m, costs of A$15.9m, depreciation/amortisation/financing of A$52.9m, profit before tax of A$4.6m.

Sydney Lane Cove Tunnel

This part of the main route north from Sydney has seen static traffic with a small increase in toll revenue (0.3% - EBITDA 4%). Bear in mind the history of this project in that Transurban bought it from the receivers for around 60% of the cost of constructing it, after traffic and revenue numbers did not meet forecast expectations. A key project is to consolidate and reduce costs in maintaining Transurban's Sydney highway assets, which may partly reflect the better EBITDA figures. Lane Cove Tunnel does have an untolled alternative, so is sensitive to pricing, congestion levels on the surface streets and limited competition from rail. Concession ends in 2037.

Revenue of A$31.7m, costs of A$13.4m, depreciation/amortisation/financing of A$22.1m, meaning a loss before tax of A$3.8m

Sydney M1 Eastern Distributor

This is the highway that connects Sydney Airport to the city and the harbour crossings. It has seen a small decrease in traffic (0.4%), but a 8.2% increase in toll revenue (EBITDA 8%) due to 9% toll increases ($A 0.50), indicating low elasticity of demand on this key corridor (which also has intensive rail competition, and parallel inferior surface streets). Transurban has a 75.11% shareholding in this road. Given the time sensitivity and the constraints in corridor expansion along this route, it can be expected that this investment can deliver more over the long term. Concession ends in 2048.

Revenue of A$51.3m, costs of A$13.7m, depreciation/amortisation/financing of A$48.3m, meaning a loss before tax of A$10.7m.

Sydney Westlink M7

The M7 runs north-south along the western end of the Sydney orbital ring road, and so is a core part of Sydney's bypass, but also connects the northwest and northern suburbs with the south, avoiding the need to use the harbour crossings. It has seen a 2.4% increase in traffic, and 3.2% increase in toll revenue (EBITDA 3%). A stable route, growth being dependent on growth in housing and employment at Sydney's periphery promoted by the location of growth nodes at either end of the motorway. 50% owned by Transurban. Concession ends in 2037.

Revenue of A$106.6m, costs of A$23.8m, depreciation/amortisation/financing of A$177.2m, meaning a loss of A$94.4m before tax.

Sydney M5 SouthWest

The M5 is Sydney's main motorway south-west towards Canberra and Melbourne. It has seen a small (0.4%) decrease in traffic, but 10.1% increase in toll revenue (EBITDA 11.4%) due to toll price increases. This road is 50% owned by Transurban, and has its own widening project underway, which means an additional lane each way (from 2 to 3 lanes in each direction). It also has the eccentricity of a taxpayer funded rebate scheme for regular users, which was a 1995 electoral bribe by the then Labor state government. It means that vehicles that are owned by a New South Wales resident, registered in the state for private, pensioner or charitable use, and are equipped with an electronic tag, are eligible for toll refunds. "Business vehicles" are not included. As such, there is obvious long run potential if the state finances get to the point where this is to removed. Concession ends in 2026.

Also in Sydney, Transurban is pursuing a potential project to connect its M3 to the F2 freeway (which leads to Newcastle).

Revenue of A$103.1m, costs of A$14.2m, depreciation/amortisation/financing of A$51m, meaning a profit of A$37.9m before tax.

USA I-495 express lanes

These lanes opened in November, as reported here. However, Transurban is reporting that traffic is below expectations, but systems are working well. Obviously two months are too early for any assessment of trends. It will require both marketing and patience to see if motorists become more willing to pay to bypass congestion on this route, which is the key south-west quadrant of Washington DC's orbital freeway network. Concession ends in 2087!

So far revenue of A$1m, costs of A$3.2m, depreciation/amortisation/financing of A$9.1m, so a loss of A$11.3m before tax.

USA Pocahontas 895

If Citylink is the Jewel, Pocahontas is the fools gold. It is 100% owned by Transurban and has been 65% below traffic forecasts. The results have seen a 5.1% increase in traffic and similar (5.3%) increase in toll revenue (6% EBITDA), but it remains a seriously underperforming asset (which Transurban wrote down last year by A$138 million). Problems with this asset have included the cancellation of a major property development that would have been served by the road, which was expected to generate up to 35,000 additional trips a day (the timing of the project coincided with the financial crisis and the US property market crash). It has been suggested that the loss of Interstate status didn't help, but this point is insignificant. The likelihood is that Transurban will hope that property development will be reignited so that the road will come into its own in due course. Concession ends in 2105.

Revenue of A$7.4m, costs of A$3.1m, depreciation/amortisation/financing of A$16.7m, so a loss of A$12.4m before tax.

USA I-95 Express lanes to come

As Transurban's US investments are all in Virginia, it is logical that it has also put money into this HOT lane project. It is under construction and will be completed in late 2014, and involves a 49km of new reversible 2-3 lane set of lanes south of Washington DC within the existing corridor.

Toll rate variations

The full report (PDF) includes some interesting data on the caps (if any) on toll rates for Transurban assets, as follows:

M5 South West Motorway - Escalated quarterly by quarterly CPI. The toll cannot be lowered as a result of deflation, however, until inflation counteracts the deflation the toll cannot be increased.

Hills M2 - Escalated quarterly by the greater of quarterly CPI or 1%.

M1 Eastern Distributor - Escalated quarterly by the greater of a weighted sum of quarterly Average Weekly Earnings and quarterly CPI or 1%.

Westlink M7 - Escalated or deescalated quarterly by quarterly CPI.

Lane Cove Tunnel - Escalated quarterly by quarterly CPI. The toll cannot be lowered as a result of deflation, however, until inflation counteracts the deflation the toll cannot be increased.

CityLink - Escalated quarterly by the greater of quarterly CPI or 1.1065% (being 4.5% p.a. as a quarterly compound rate) for the first 15 years, then quarterly by CPI. This is subject to a cap of annual CPI plus 2.5%, which cannot be exceeded.

Pocahontas 895 - Fixed rates until 2017 and then escalated by the greater of CPI, real GDP or 2.8% p.a.

495 Express Lanes - Dynamic, no cap.

Finally, an interesting interview with Transurban CEO Scott Charlton, reported in Business Spectator has him talking about the extension of concessions, and the payment of cashflow in dividends before reducing debts. He talks of combining into one back office for all Australian operations. He mentions the interest in applying dynamic (demand) driven pricing into Australia (which isn't possible under current concession conditions). Transurban seems supportive of a shift towards more distance based tolling and shifting from fuel tax towards tolls more generally. He confirms that Transurban isn't enthusiastic on the AirportLink or Clem7 tollways in Brisbane, but more interested in the Queensland Motorways assets.

Conclusion

Looking beyond Transurban, which has a range of assets from the remarkable to the unfortunate, one can see statistics which demonstrate some of the real opportunity costs of building major new motorways. These being costs not conventionally seen in government procured projects. That is seen in the financing costs, as these (and the capital asset value of the road) are largely hidden or written off, as they are seen in budgetary deficits as roads may be financed either by specific or non-specific public debt, or through "pay as you go" annual budgeting.

Large highways are expensive, they involve a lot of capital. They depreciate, and it is through the accounts of companies like Transurban that we can see, transparently, what they cost. The revenue they generate is clear (and it would be interesting to consider fuel taxes on top of that), and the operating costs (including maintenance) is also clear, but the big portion of costs is servicing that capital over the depreciated life of these assets. A road isn't "paid for" until those costs are paid for, and then the long run capital cost of the road is the capital renewal cycle for it, which is a very long time.

Intelligent debate about the costs of highways, relative to other modes, cannot be had until there is more data on the relative costs of highways, compared to other private investments, and other parts of the economy. Of the seven highway assets owned or part owned by Transurban in full operation, three make a profit and four have been making a loss (before tax), the losses are due to financing costs not been recovered from revenue from users. One of those had a major refinancing in the past year, others have localised issues, but Pocahontas is a road that shouldn't have been built when it was, and I suspect had the project been entirely led by investors - not a government promoting the road on its own, it would have been quite different.

Some projects would thrive, Melbourne Citylink saves a fortune in time and fuel for those who use it, and has unlocked significant benefits for Melbourne in relieving congestion to and from the airport and across town. Others would not be built. That is how it should be. Tolling, of course, provides a good proxy for whether a road should be built, notwithstanding the two distortions not reflected in this - the presence of fuel tax (which doesn't pay for the road) and the existence of parallel untolled routes (which get more demand than they should).

As jurisdictions in North America and elsewhere look at what to do about the future of fuel taxation, one suggestion has been put forward by independent transport policy advisor, Phil Carey, who used to be had of the Road Pricing Framework Division (when it existed) at the UK Department for Transport and previously led the transport policy review for the Prime Minister’s Forward Strategy Unit.

It was circulated by the RAC Foundation (not prepared for it), and is another cut on the options available to the UK government for reforming vehicle taxation.

The report is here, below is a summary of the key points. Essentially, it is a way of applying the technologies available for road pricing, but in a way that uses fuel duty to affect behavioural change. The philosophy behind it is described in the executive summary:

rather than trying to levy an extra charge on reluctant drivers, the flexibility of fuel duty means the government could instead go down the easier route of offering a rebate: less fuel duty to pay if the vehicle has been driven on less congested roads. This aligns well with the current focus on behavioural economics, i.e. rewarding people for desired behaviours. If the numbers are to stack up for the Treasury, fuel duty would clearly have to rise to better reflect the costs of driving in congested conditions. However, almost all drivers would then get some rebate – modest in cities, potentially substantial in rural areas. The net effect is a more finely-tuned ‘intelligent fuel duty’ (IFD), collecting a fairer charge based on how motorists actually drive, and acting in a much more economically efficient way.

Proposal

Fuel duty should be increased so that in real terms it charges at a level equivalent to a congestion charge, but all vehicles can choose to be equipped with devices that enable them to claim a rebate for not driving at peak times on congested roads. Those that do not get equipped, would pay the full price.

Fuel duty is, in effect, pre-payment to use roads, so the rebate system would be rewarding the use of roads at times when the full duty should not apply.

"A simple, well-publicised banded structure assigns different levels of rebate per km driven on different types of road at different times; there is no discount for driving on urban roads at peak periods."

It becomes a reverse congestion charge, so that motorist would know they would get a greater rebate driving in the off peak. The technology used is not detailed, but could involve a smart phone linked to the vehicle, or a bespoke GPS device. What would matter is that it was able to identify driving outside the charged times and roads, as long as it could do that, then the discount would apply.

Hypothetical fuel duty rebate rates

The report contained the table above, and several others as samples of how it could work. As you can see, at peak times, motorways and urban roads may be deemed to be "congested" and see no rebate, but rural routes would have a reduced one. Whereas mid and low charge periods would have various levels of rebate built in. Of course, this is just a concept, and alternatives may suggest a minor rebate for motorways over urban roads, to encourage traffic to use roads at peak times that are better suited for it.

Principles

The key points of the proposal surround the weaknesses of fuel taxation, and the difficulties of introducing any new forms of road pricing, largely due to the political toxicity of the issue. His key points are:

- It is unfair to keep increasing fuel tax in a way that bluntly adds to charges for all motorists, regardless of where and when they drive. "At a typical average fuel duty plus VAT cost of 5 p/km, rural driving on quiet roads ends up paying far more than all the costs it conceivably imposes. In fact analysis shows that at least 70% of all driving brings in more revenue in fuel duty than all the identifiable costs it imposes in congestion, pollution (including carbon) and accidents". Indeed, some would debate that the costs are that high, but the key point is fair. Increasing fuel taxes continues to overcharge the many, and undercharge the few, if one goal is to reduce congestion;

- He notes the advantages of the "Road Ahead Group" Brian Wadsworth proposal to reform Vehicle Excise Duty, but that it leaves fuel duty alone. A point that I share. Noting "At present we are caught by the Treasury’s understandable desire to protect the current attractions of fuel duty and to target carbon reduction, and the political wish to avoid anything that smacks of extra charges for using roads. The result is paralysis in the face of the congestion challenge."

Problems

The proposal rewards off-peak driving or driving on uncongested roads. There would be some controversy about motorists who have filled their tanks, pre-paid at the full rate, but drive only occasionally, as they would only be "rewarded" if they drove to use up the fuel in their tanks. In effect, it penalises occasional motorists because it may be some weeks or months before they get the rebate. Given there is likely to be a cost to be equipped to facilitate the rebate, it imposes an additional cost on those users (although this could be overcome by some sort of subsidy).

The long term strategy for such a rebate is unclear. The long term issue of fuel efficiency isn't addressed, as those with the most fuel efficient vehicles still pay less, and those unable to afford such vehicles pay the most. It certainly doesn't address the sustainability of revenues from fuel taxes. Over time, rebates would need to be adjusted, and hybrid/alternatively fueled vehicles would face quite different incentives.

There is a considerable amount of central government mandated technology and planning required, as roads would need to be designated as congested at set times on a case by case basis for this to be most effective. This could be delegated to local authorities, but does contain risks of information being wrong if it is centrally managed.

Users would complain if things went wrong, so you would face considerable expense from "customers" seeking money back.

Foreign vehicles would be a complication, as there are issues under EU law about not making this available to such vehicles on an equivalent basis (although there is no big reason to say no to offering it to foreign vehicles).

Then there is commercial vehicles, which are excluded from the proposal in theory, but in practice would face a real difficulty because fuel duty reform of this kind would necessarily have to include diesel. So it would be wrong to not raise diesel the same as petrol (especially given the environmental impacts), but that would mean including all vehicles in the rebate scheme. Not a bad thing in itself, but it is hard to see how the line can be drawn based on fuel.

Conclusion

I like the concept in principle, as it is one way of trying to address the toxic politics of road pricing, but delivering significant potential benefits in terms of behaviour change.

However, the prospects of increasing fuel tax to the level needed to create serious behavioural change are daunting, and I doubt it could be announced in advance and be politically acceptable. We are talking here about a doubling of fuel duty, in effect, and telling all motorists to relax, they only need a government mandated device to get a rebate from it. I do not think this is substantially less toxic than suggesting the alternative of offering people the option of paying less fuel tax by paying per mile.

What is behind it is intelligent and economically sound, but the need to address the sustainability of fuel tax means that it would be better to consider how to approach some replacement of that tax, rather than find ways to increase it and then offer a rebate.

The congestion relief benefits from this proposal are potentially high, as they are for simply moving to road pricing, but it is because of the increase in fuel duty that this happens.

Furthermore, it has the more fundamental problem of needing to be centrally managed. One of the object lessons of major IT projects in the UK is that they are to be avoided, for the risks involved in terms of cost, scope creep and poor quality procurement are considerable, and are not born by those making the decisions. Far better in my view to look to devolve responsibility for these issues from central government to a set of highway companies who can best make these tradeoffs. For this concept to work easily, it would see city centres or major corridors deemed "rebate free" at certain times, and the debates would come as to what those times are and what corridors it means. This opens up a Pandora's Box of arguments that are impossible to resolve centrally, and which local authorities will be incentivised to adjust for their own ends. I would be sure many would simply say their entire cities get the rebate, then the issue of hypothecation (which this proposal seeks to avoid) rears its head. What incentives are there for local authorities to get that right, when there are political and business access issues that will, initially, be very loudly resistant to the concept.

If it did not target with that degree of precision, it would give rise to all sorts of accusations of being too blunt.

In that light, I prefer an approach that doesn't fiddle with fuel tax, but offers motorists options to pay per mile, and get a proportionate refund in fuel duty.

It does not address congestion, but starts to offer an incentive to move away from fuel duty to paying directly for road use, which in itself will influence demand. Over time, it would have to include some compulsion (i.e. all new vehicles automatically paying according to distance), and then it starts to be able to include some modest variations in charges based on time of day. It has the advantage of a relatively low profile introduction, so has a greater chance of being accepted, and being able to protect against the erosion of fuel tax revenue. It doesn't deal with congestion, but Brian Wadsworth's proposal (PDF) could, in parallel with this, contribute towards an incentive to avoid peak driving.

I can envisage a system whereby motorists opt in to paying by distance on all roads (perhaps cheaper on motorways than other roads, to reflect relative infrastructure costs), and get a proportionate refund in fuel duty, but also can earn a rebate on vehicle excise duty based on when and where they drive. Both would be optional, but such a proposition could be made compelling for many motorists (although the Wadsworth proposal would need tweaking to incorporate HGVs in a way that is fair and does not breach EU law).

The key is for it all to be voluntary to be acceptable to enough people, and for trust to be built up that the new voluntary options actually involve getting some value from a system that most perceive simply rips them off.

Tuesday, 5 February 2013

In the road pricing world, Germany is best known for one system - the LKW-Maut truck toll which charges all trucks 12 tonnes and above according to distance travelled on all motorways and some secondary highways. It was the first such system ever to use GPS technology as the primary measurement of distance as the chargeable event (distance charging existed elsewhere, but used other technologies). That toll is now being extended to a far wider network of highways as follows:

for which the Federal Government is responsible in terms of construction and maintenance,

that do not pass through built-up areas,

having two or more lanes in each direction,

whose carriageways for the two directions of traffic are separated on their entire length by central reservations or any other structures,

that are at least 4 kilometres long and

that are directly linked to a federal motorway.

Beyond that, there are a small handful of toll roads, but for private vehicles, the charge almost all face is simply fuel tax and motor tax (an annual ownership tax).

However, the report quotes one Minister as saying that cities need to find new sources of revenue, indicating that what they really want is a tax, that delivers other positive outcomes.

The German automotive lobby is known to be adamantly opposed to tolling, to the point that there are very few toll roads in Germany for cars (the LKW-Maut truck toll system is a different matter). Ulrich Klaus Becker, vice-president of the German automobile club ADAC was opposed on the grounds that it just added costs to motorists.

The report then makes a very blunt claim that such charges could have a negative economic impact:

Economy experts also warn of how a congestion charge could negatively affect commerce, pointing out that German drivers already pay a total of more than 53 million euros in motor vehicle taxes, petroleum taxes and other dues. Herbert Schulte, of the German Association for Small and Medium-sized Businesses, blames the lack of money for road construction on a poor distribution of funds.

There can always be a sound argument about the existing uses of taxation, although the "million" in that report is actually a "billion". None of the fuel taxation in Germany is hypothecated for transport spending, but there is a better argument that can be made, about whether it would be better to replace some existing taxes with forms of road pricing.

The report continues to say that the mayor of Tübingen, in the southern state of Baden-Württemberg, Boris Palmer, wants a one euro charge to enter the inner city, although it quotes "traffic expert Michael Schreckenberg" who believes it wouldn't generate that much money.

Renowned expert, Andreas Kossak, who runs his own business AK Research and Consultancy, was an advisor to the commission and says that the work that has been done has been primarily about congestion charging for traffic management and environmental protection purposes, with revenue being secondary, and that German news reports seem to have distorted this.

Only vehicles with a Euro 4 (or retrofitted Euro 3) rating are permitted to be driven in the low emission zone. It is enforced by requiring all vehicles to have a sticker that depicts the emissions rating of the vehicle. The sticker is applicable across Germany, but issued locally and available online. Foreign registered vehicles in the category below that are also allowed (Euro 3 or retrofitted Euro 2) until the end of 2014. A fine of 40 Euros is issued to any vehicle found to have entered the zone without the correct sticker. It applies to both cars and commercial vehicles, including all trucks. Coaches are also included, although there is an exemption for Euro 3 vehicles that get a certificate that they cannot be retrofitted technically.

There are exemptions for cars with passes for the severely disabled, specified vintage vehicles, mobile equipment and machinery, motorcycles and three-wheeled vehicles, emergency vehicles, military vehicles and refuse collection vehicles (and a handful of other minor categories). The zones apply 24/7, that means there is no period at all during which higher emission vehicles are permitted to operate

It covers an area of 88 square kms, bounded by the orbital suburban rail line in the city. Reports of its success indicate particulates have dropped by more than 50% and nitrogen oxide emissions by 20%.

With so many of these in place, it wouldn't be technically too difficult to convert many into congestion charging zones, although sticker based enforcement (in the case of Berlin) is not exactly what is needed. However, any such charges should be based on targeting congestion where it is at its worst, rather than adopting a simple scheme option because it is easy to implement.

While debate continues at the state and city level, the Federal German Transport Minister Peter Ramsauer (CSU), is advocating a vignette for cars to use the motorways and major highways. This would correspond to the LKW Maut truck toll that charges by distance on such roads for vehicles over 12 tonnes. Austria has a similar pairing of charging for its motorways, with distance charging for vehicles over 3.5 tonnes, and a vignette for those below that. Belgium is looking to introduce a vignette for light vehicles, and Hungary, the Czech Republic, Slovakia, Bulgaria, Romania and Slovenia all have a vignette.

The vignette is essentially a pre-paid access charge to use a network of roads. A motorist can typically buy three products. An annual charge, a monthly charge or one for a period ranging from 4 days to 2 weeks, depending on the country. For German residents, they would need to decide if they use the motorways sufficiently to buy an annual charge or not. Foreigners would also have to purchase such a vignette. Given that Germany has considerable numbers (although proportionately not high relative to domestic traffic) of foreign registered cars using its roads, in theory it could recover tens of millions of Euros of revenue from foreign vehicles - it could correspondingly reduce vehicle ownership taxes, so that German citizens did not have to pay more. The argument being that German citizens face vignettes in many other European countries (or tolls), but those residents don't face such charges in Germany.

It is clear that the big undercurrent in Germany regarding charges is about revenue. Congestion charges could deliver that, but be unpopular particularly if motorists see them being driven about money, not managing congestion. Vignettes could deliver some as well, but are unlikely to be accepted by many unless they get a corresponding cut in other taxes. It would also have to be designed in a way that ensured that motorists who chose not to buy the vignette did not congest roads that were not subject to it. Germany is adept at doing this with the LKW-Maut now (having added non-motorway, highways to the charged network purely for this purpose).

Standing back from this, there needs to be a consideration at Federal and State levels as to what they want their highway networks to deliver. This means being strategic about future investment (including taking cold economic decisions about what improvements are worth proceeding with), about adopting best practice asset management systems to optimise expenditure on maintenance, and then what revenue is needed to pay for it, and from what road users. The LKW-Maut is an excellent starting point, as are the low emission zones, which appear to have delivered on what they have promised. However, the discussion is now moving towards wider reforms. In that field, replacing part of vehicle ownership taxes with a vignette may be a useful step forward, but a bigger step would be intelligent discussion about the future of fuel taxes.

At the political level, I'd encourage cities and states to pursue their own solutions, but Federally the new Federal Government should be bold in terms of setting a strategy for better charging of roads. That should have economic, revenue and environmental dimensions to it, and not be afraid to talk about the options that get instant opposition - by talking about tax reform, not new charges.

Monday, 4 February 2013

Jakarta has serious congestion, which is estimated to cost RP46 trillion (US$4.7 billion) a year in delays, wasted fuel and vehicle wear and tear, with fuel being the biggest cost (no doubt because the value of time in the city is relatively low on a per person basis). The city is developing bus rapid transit, has plans for a metro and is widening existing corridors, but its most ambitious plan is to build six new urban toll roads. The intention is for them to be tolled, not just to pay for the high capital costs, but to manage demand, so that the inexorable demand for road space is tempered by having to pay for it.

However, it is controversial as the Jakarta Transportation Council, an advisory body, says it will have "no positive effect" on traffic, according to the Jakarta Post. The projects will cost RP42 trillion (US$4.1 billion). Objectors say it will encourage sprawl and pollution, harming the environment and public health, although it is entirely plausible that the roads could be priced and managed to minimise this. Some argue that as the new roads are being built above existing railways or roads, that the railways should be expanded instead. The project was advanced by the previous Governor, with one argument made that the city has a small proportion of land dedicated to roads at 6.2%, when the target is 12%.

I'm hardly in a position to judge on this, particularly as it is easy for middle income people in wealthy countries to pontificate about what is good for developing countries, and also because I am technologically neutral. Roads are simply transport corridors, and as long as they are priced correctly, and the corridor managed well, there is no reason for them not to be positive for public transport, and to allow road space on the routes bypassed to be given over to pedestrians, cyclists, carts, and to properly regulate parking.

The six roads are shown on this Jakarta Post map:

The first phase of construction will include the 17.8-kilometer route from Semanan, West Jakarta, to Sunter, North Jakarta, and the 11-kilometer route from Sunter to Bekasi.

The second phase includes roads from Duri Pulo, Central Jakarta, to Kampung Melayu, East Jakarta, and from Kampung Melayu to Kemayoran, East Jakarta.

The third construction phase will link Ulujami, South Jakarta, to Tanah Abang, Central Jakarta and the fourth will connect Pasar Minggu, South Jakarta, to the Casablanca area in South Jakarta.

Jakarta is also planning an electronic road pricing system to manage congestion, with legal approval for introduction reached in October 2012. I will write more on that later. However, I would hope that before that happens, that all toll roads in the city get converted to electronic free flow systems, which will be necessary for any form of congestion pricing in any case.

In any case, the Jakarta Post reports that it is now up to current Governor, Joko “Jokowi” Widodo, to decide on starting any of the new toll road projects.

At least 800 drivers on the Triangle Expressway have been double-billed this month, paying electronic tolls twice for every trip, the N.C. Turnpike Authority says.

The problem is fairly obvious, motorists travelling with two tags both of which are getting recognised and generating a bill. The NCTA has its own "Quickpass" as its product, but some motorists also have the EZ Pass tag, used across 14 states.

You see the Expressway is fully electronic free flow, but as of the start of 2013, it has been interoperable with EZ Pass, so there are customers with both units, and so are being billed twice.

The NCTA blames motorists for this, because the terms and conditions for its contract with customers using Quickpass is for only one tag/sticker to be in a vehicle at any one time. However, as true as this may be, the system should have avoided this problem in its architecture.

For the system architecture should not allow two chargeable events to be attributed to the same number plate. This isn't hard to manage, as the system ought to reconcile these sorts of events (and indeed this will become more common over time), so that while motorists should only use one device at a time, the system should not charge an identifed vehicle more than once in a specific interval.

There have been various reports of what is essentially a public opinion survey about transport policy, that came to the conclusion that people in Washington DC are most accepting of tolled lanes, and least accepting of distance based road pricing. Really? It took money to figure that out? The Brookings Institute research is interesting in as far as it shows considerable support (60%) for toll lanes - but beyond that it isn't anything that any expert in this area could not have expected.

There have been surveys about road pricing for many years in many countries, and the conclusion is pretty much always the same. The majority oppose paying more to use existing roads, and the more complicated the proposal they more resistant they are. They like it better if more money (whose?) is spent on more public transport and other alternative modes.

The acceptance of toll lanes is obvious, as they are optional. The lesser support for some sort of cordon based pricing is because it would not be, and distance based pricing is always clumsily sold as some sort of tracking system, and there are no explanations made of how much people pay now with fuel taxes.

The errors in this work look like (from the reports) to be:

1. It provided details with little rationale as to what the merits of them are;

2. It gave people little confidence in what any of the options would deliver (why would anyone support paying more without understanding or believing that conditions could improve);

3. It provided options without reference to replacing the gas tax;

4. Those undertaking the survey appeared to be unable to answer core criticisms of the public, such as thinking that a cordon creates congestion just outside it.

It was undertaken using public forums. Maybe the 20th century would like to get it survey technique back. The busiest people or those with the least flexibility are unable to participate in such a manner.

Now I am pleased these issues are being discussed in the United States, it has taken long enough, as only eight years nobody talked about pricing existing roads. However, it would be good for the debate for surveys like this to not occur.

Are surveys undertaken about taxation policy, health policy, how to manage the electricity or telecommunications networks? No. Why would anyone presume that the general public - who can attend such meetings - are sufficiently well informed to react intelligently to what is presented to them? More importantly, why aren't the lessons learnt from those who have tried to do this actually being applied in describing options and managing such processes?

Washington Examiner damns plan to "nationalise" Dulles Greenway

In a local editorial, the Washington Examiner describes plans to socialise/nationalise the Dulles Greenway as one that will "saddle Virginia taxpayers with this white elephant". The plan comes from Virginia House Transportation Committee Chairman Joe May, (R-Leesburg). So yes it is a Republican wanting the government to take over a private business, ostensibly to subsidise the users of that business. The report states the road loses US$25 million a year, which would effectively be transferred to taxpayers.

The private owner, Macquarie Atlas Roads, would of course seek to maximise the price that it would extract from a willing buyer, and the continuing unprofitable nature of the road would be hidden in the state's public debt and general taxation.

It all seems absurd. The whole point of private road concessions is to transfer risk, which is what has been done in this case. The road has been built, the tolls are relatively high, but increases are capped by the concession, and the continued losses are born by the investors. Far better for the motorists on the road to be effectively subsidised by the private owners (which is a transfer into the state from foreign investors) than from taxpayers.

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What is road pricing?

Road pricing is any system that directly charges motorists for the use of a road or network of roads. Traditionally it has meant tolls on single routes, particularly crossings such as bridges or tunnels. More recently it also includes area, cordon and zone pricing of urban areas, and distance and time based charging of whole networks. It does not include fuel or tyre taxes, or taxes on ownership or purchase of road vehicles.